Can Japan Compete? [Part One]

Not long ago, Japan was considered a competitive powerhouse with exemplary business practices that were admired and often copied, particularly in the West. What went wrong? In a new book, HBS professor Michael Porter and two coauthors take a closer look. [ Part 1 ]

by Martha Lagace and Hilah Geer

Editor's Note— The puzzle, they explain, has to do with the explanation for Japan's extraordinary economic success in the post-World War II period. The country was heralded around the world for creating what looked like "a new and superior form of capitalism," thanks, in large part, to what were considered exemplary policies and practices by government.

By looking more closely, however, Porter, Takeuchi, and Sakakibara also began to discover what they call "another Japan." While the country did boast a number of strong industries, it had even more failures. By suppressing competition, the authors came to believe, government had inflicted detrimental effects not only on industry but also on the Japanese economy as a whole.

Their new book Can Japan Compete? is the result of years of research by Porter, the author of widely influential studies of competitive strategy; Takeuchi, a former HBS professor who is now dean at the new Graduate School of International Corporate Strategy at Tokyo's Hitotsubashi University; and Sakakibara, a former Ministry of Trade and Industry (MITI) official with a doctorate from Harvard who is now an assistant professor of management at the University of California, Los Angeles.

The book examines the inner workings of Japanese successes and failures of the past and present. It also imparts some clear lessons about company strategy and national competitiveness for the future—not only for Japan but also for other nations east and west.

As for the question, "Can Japan compete?", the simple answer is yes. The real question, according to the authors, is, "Will it choose to compete?"

First published in Japanese in the spring of 2000, the English version of the book was released this past autumn. HBS Working Knowledge writers Hilah Geer and Martha Lagace met recently with Porter to talk about the lessons Japan teaches governments and companies about competition and strategy.

Below are excerpts from the interview; part two will appear in the January 8 update of HBS Working Knowledge

Perhaps I'm not the most objective person to answer that question ... but we have been thrilled with the response so far.

The really good news, I think, is that opinion leaders in Japan have been persuaded by the book. I was invited to personally give a copy to the prime minister. We are hoping that the book becomes the basis for—and becomes an important part of—the change process that's necessary.

Japan is really stalled right now. As the book argues, macroeconomic reforms and stimulus packages are not going to be the answer. There's still little real change in Japan on the government side, other than some marginal improvements.

The response on the corporate side is much better. Yet there is still a stark contrast between the situation of Nissan, for example, and the typical Japanese company. Under a non-Japanese executive, in one year Nissan has gone through a major reconfiguring and has actually achieved profitability, whereas the typical Japanese company is making very timid moves which are on the margin.

[Our book] was first and foremost an effort to influence thinking in Japan. Because Japan has such an impact on thinking, we were also very anxious to set the record straight about what actually happened there. The preface describes how important the Japan case has been for the U.S. Hopefully, the book is also a contribution to thinking about competitiveness in general.

In one part of the book, you and your coauthors write: "What really ails Japan has to do with the nation's deeply ingrained attitudes toward competition." What do you think is the source of this mistrust of competition?

On the government side, I think the big problem was that Japan never really grew up. Japan was defeated in World War II, and came out of the war a devastated country with massive poverty in the late '40s and early '50s. The government in those days pursued very aggressive forms of intervention in the economy in order to conserve foreign exchange, and to allocate the limited resources available at the time to a few sectors that could provide critical basic commodities, such as chemicals and steel. The early intervention, under crisis circumstances, was arguably positive for the country.

Over time, however, Japan's economy strengthened. Instead of then opening the economy and unleashing competition in the marketplace, the Japanese government continued limiting and regulating competition in many industries.

In Japan, there has been a desire that no company goes bankrupt and no worker ever loses a job. Some Japanese attribute this mentality to Japan's agrarian history. Farmers all help each other. This mentality was reflected in a variety of policy areas. There is a lax antitrust policy, for instance, which leads to informal cartels. Some cartels are actually legal. There is a history of practices that insulate companies from international competition. Small retailers have been protected from big retailers.

The idea took hold that the Japanese approach [of restraining competition] was superior and that it enhanced competitiveness.

What we show in the book is that, actually, the Japanese model of government policy actually did not work, and does not explain the Japanese economic miracle.

We show that, in fact, the reverse was the case: that the approach is actually at the root of most of what is uncompetitive, inefficient, and unproductive in the country. And the Japanese government model had profound costs that were unrecognized.

Protecting local industries such as the construction industry or agriculture seemed pretty innocuous, but it had huge costs that were hidden for a long time by the growth occurring in the competitive part of the Japanese economy—where largely government had little role. But eventually the cumulative negative effects of the bad policies became overwhelming. By the mid-1980s, the evidence was quite clear that Japan was in trouble. We just didn't see the signals until the crash in the early 1990s.

It will be very hard for the Japanese government to make the necessary policy changes because these attitudes are so deeply ingrained, particularly in 60- to 70-year-old officials who are in senior posts. Change will be more rapid when the next generation of leaders starts to move into positions of power in Japan.

The previous system gave government officials enormous power and prestige. In fact, bureaucrats in MITI [the Ministry of International Trade and Industry] were much more powerful than the elected political leaders—who had little real influence on policy. It's very hard for people in a very prestigious occupation — where one applicant out of 10,000 got a job at MITI — to change their world view and do something different

Change is starting to occur. Officials are quitting MITI and the Ministry of Finance early. Prime Minister Yoshiro Mori is more of a transitional figure. It is likely that one of the next one or two prime ministers will be from the next generation.

On the company side, Japanese leaders acknowledge the arguments in our book, and change is more rapid than in government. However, it's hard to unwind the keiretsu [close-knit business groups] system and move away from lifetime employment. It is still hard for Japanese companies to adopt real strategies. There are huge pressures for imitation because of consensus decision making.

But I think Japanese companies are definitely moving in the direction suggested in this book; it is a question of pace. The best companies, however, are still viewed as mavericks, outside the mainstream.

Companies are being pressured by foreign shareholders and competitive challenges. Many Japanese companies now have 25% of their stock owned by foreigners. In the case of the government, part of the problem is that there are no market forces. The Japanese electorate is not demanding change yet.

The keiretsu system sounds, on the face of it, not unlike your theory of clusters. What is the difference?

The keiretsu system involves the cross-ownership of companies in each other's equity. Like clusters, this creates linkages across companies, but the two systems are almost the opposites. The keiretsu system essentially walls off companies from any shareholder pressures because the majority of their ownership is in the hands of friendly companies. Companies in the keiretsu are expected to serve each other, and supply each other with products and services. There is a quasi-guaranteed internal market. The positive side of the keiretsu system was that it enabled companies to take a longer-term perspective. But the downside proved to be much greater than the upside.

By insulating companies from any real pressure to perform, the keiretsu system perpetuated a form of competition where companies had too many product lines—many of which didn't make any money—and too many employees.

From the standpoint of strategy, the book describes how the keiretsu system contributed to the tendency of Japanese companies to try to be all things to all people. Companies were hyper-responsive to meeting the needs of all their sister companies.

Clusters are based on informal relationships among firms. When firms are concentrated in a given area, firms can get the benefits of collaboration and frequent interchange without the need for alliances or formal partnerships with the accompanying rigidities. Cooperation in some forms co-exists with intense competition in the marketplace.

Firms in a cluster interact because it's in their interest to do so, not because they own each other. The cluster tends to accentuate competition and make it more intense, rather than eliminate or relax it.

The analogy to the keiretsu system has been widely touted in the Internet era. Companies such as CMGI billed themselves as new economy keiretsu. We are seeing a similar outcome as in Japan. The model turned out to be more of a hindrance and a distraction than a help.

In the new book, you cite several older companies that have applied strategy successfully. One example is Honda, which was founded in 1946. Why are these particular companies able to embrace the concepts of strategy while others don't?

Honda is an old company compared to many, but it is the youngest among auto companies. Nissan and Toyota were already well established, and Honda had to find some way of breaking into the market. It adopted a distinctive strategy instead of copying its rivals.

In the book, we note the striking number of really interesting Japanese companies that are not based in either Tokyo or Osaka. I came across another interesting one recently: a company called Disco is a world leader in precision cutting tools. It is based in Hiroshima. By being outside the establishment and not members of keiretsu, they seem to have been able to avoid the problems of Japanese companies in general.

Much has been written on Japanese management. Japanese companies pioneered lean production, "total quality management," and "just-in-time manufacturing." However, these practices have been widely imitated. The next challenge for Japanese companies is strategy.

How can companies set themselves apart and be distinctive? How can Japan innovate? How can the cultural forces and social norms that work against more advanced forms of competition be overcome?

That's the challenge.

Conclusion of part one. Part two of this interview with Professor Porter appeared in the January 8 update of HBS Working Knowledge.